How BigHub raised big money and avoided Securities and Exchange Commission scrutiny
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
May 18 1999
A curious document has been making the rounds on Wall Street in the last couple of days. Across the top are written the words Confidential Placement Memorandum. But what the document really amounts to is a warning of the perils that await investors in so-called bulletin board stocks that trade on Nasdaq's Over The Counter market.
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Bighub.Com Inc (the)
(BHUB)
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$15.25
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THE PERILS lurk in the fact that virtually no bulletin board stocks are required to file financial reports with shareholders or the Securities & Exchange Commission. And that in turn means that people often have nothing to base their investment decisions on except rumors and company-orchestrated press releases that rarely tell the full story. Case in point: the secret, though apparently quite legal, money-raising scheme of a Web-site operator known as BigHub.com. Until May 17th, BigHub (at http://www.thebighub.com/) was known instead as iSleuth.com, a Web search engine company through which Web users can, in effect, search the Web by tapping into many conventional search engines at once.
The company's stock sold for barely $1 a share as recently as last November. But with the explosion in
Internet stocks, iSleuth.com as well got swept aloft, and by March was trading for $5 per share. But then in early April, and for no obvious reason, the company's stock price began to surge on volume that itself began to grow. One possible explanation for this now presents itself in the form of some rapid-fire developments that have followed the runup. Most of these developments were eagerly brought to the public's attention by way of company-issued press releases but one key development has been kept shrouded in secrecy until now.
First, on May 13, with iSleuth's shares having already doubled from their mid-April level, the company announced that it was changing its name from iSleuth to BigHub.com and was launching a new growth strategy designed to make the site a retailshopping portal.
Shortly after changing its name from iSleuth.com to BigHub.com, the company began circulating a
confidential placement memorandum on Wall Street to raise $20 million for the company.
Then, only days later, the company announced on May 17 that two top officials from Shopping.com ù the California-based Web site that was recently acquired by Compaq Computer Corp. after having become mired in a securities fraud scandal involving its underwriter ù were joining BigHub.com's board of directors. Though the company issued a steady stream of press releases documenting these and other stock-boosting developments, it somehow overlooked telling the public something of obvious interest to every investor. The vital information? That shortly after changing its name from iSleuth.com to BigHub.com, the company began circulating a confidential placement memorandum on Wall Street to raise $20 million for the company. Investors who had paid as much as $15 per share for BigHub.com's common stock in the run-up would doubtless have been shocked to learn that the $20 million being raised through the offering was, in effect, being raised directly at their expense. The gimmick? A highly dilutive rights offering in which sophisticated investors were being offered a chance to buy convertible preferred shares that could be quietly held for 30 days, then exchanged for BigHub common stock at $4 per share. Thereafter, as set forth in the offering, the $4 shares would be able to be resold in the open market for perhaps as much as $15, giving investors a whopping 300 percent return on their money.
For their part, everyday investors were set up to stand by in blithe ignorance that the deal was even taking place at all. As a result, they would not have known that the company's total shares outstanding were in the process of secretly being doubled, promising a 50 percent or more dilution in their existing equity interests ù and, possibly, a collapse in the value of their holdings as well.
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The company's investor relations spokesman, Sanjay Sabnani, said Tuesday that he knew nothing of the deal and could offer no explanation as to why the existence of the offering was not publicly disclosed. He directed further inquiries to one of BigHub's new board members, Mr. Pat J. DeMicco, an ex-marketing vice president at Shopping.com. At press time, DeMicco had not returned calls.
In reality, the mystery enveloping BigHub.com derives from the fact that BigHub is a so-called non-filing company. That is the status of companies that begin life as penny stock offerings in which shares are sold to the public in amounts that raise less than $1 million per year. Such offerings are generally exempt from securities law financial reporting requirements. As a result, BigHub.com was under no obligation to
disclose to its stockholders that it was, in effect, setting them up as bait for a sale of $20 million worth of convertible preferreds.
And because the convertible preferred offering was ostensibly being marketed only in units of $1 million-plus and thus only to presumably sophisticated investors who knew what they were doing ù that offering as well did not have to be registered with the SEC.
In other words, for this publicly traded, $65 million (market cap) company to raise yet another $20 million from investors, nothing had to be registered with the SEC not for the $20 million in the private placement, nor indeed for the $65 million worth of underlying common shares that gave the whole deal its appeal.
Nor is it even clear how the company will now use the resulting proceeds. The offering says only that the money will be used for marketing, working capital, and general corporate purposes How things work out in practice thereafter will be, well, just another one of those multiplying BigHub unknowns.
Though the offering memorandum says the company intends to file a registration statement with the SEC within 60 days of the completion of the offering, its credibility on that score simply isn't very convincing.
In January, the company issued a press release saying it intended to become a fully reporting company with the SEC following the completion of its annual audit in February. But it is now mid-May, and according to Sabnani, the company has so far not done so. And even if the company does now file an S-1 for the preferred shareholders, there is no assurance that the registration will be approved. This could mean that even the fat cats as well could wind up BigHub stuckholders instead of stockholders, while the company itself winds up never having to account adequately for the money at all. Would you like to get in on the deal anyway? Sorry, but you're too late. Said Vince Callichia, who has been fielding calls on the deal at the Wall Street firm of Robb, Peck and McCooey, The deal is pretty much closed. I can't give you any information on it. When it comes to Over The Counter bulletin board stocks, that is always the end of the road where all inquiries eventually wind up: Sorry, no information available. In other words, invest at your peril.
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